Edited version of private advice

Authorisation Number: 1052025425878

Date of advice: 24 August 2022

Ruling

Subject: CGT - replacement asset rollover

Question 1

Is the replacement asset rollover under section 124-70 of the Income Tax Assessment Act 1997 available in relation to the compulsory acquisition of the taxpayers' property?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997 to allow the taxpayers an additional time to acquire a replacement asset?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20YY

Income year ended 30 June 20ZZ

Relevant facts and circumstances

1.      The taxpayers ('the partners') are the two partners in a partnership ('the Partnership').

2.      The Partnership conducts a business which derives income from its business properties.

3.      All properties managed by the Partnership are held on capital account and owned by the Partnership.

4.      The partners personally manage and operate the business. When required, the partners engage contractors to assist with the operation of the business.

5.      On XX XX 20XX, the Partnership was issued with a commencement letter confirming that the agency intends to compulsorily acquire one of the Partnership's properties ('the property').

6.      On XX XX 20XX, the agency issued a Proposed Acquisition Notice which was compliant with the requirements of section 124-70(1)(c) of the Income Tax Assessment Act 1997.

7.      On XX XX 20XX, the property was acquired by the agency for approximately $X,XXX,XXX.

8.      Despite the compulsory acquisition occurring in XX 20XX, the Partnership has been taking action to negotiate the final amount of settlement for the property.

9.      The Partnership lodged an appeal in Court on XX 20XX seeking a more appropriate compensation amount from the agency.

10.   The final compensation amount to be paid was settled upon in XX 2022. The compensation to be paid by the agency was agreed to be $X,XXX,XXX with the addition of legal and valuation costs incurred by the Partnership.

11.   The Partnership received the final compensation amount on XX XX 20XX.

12.   Due to the lengthy negotiations and legal action regarding the final compensation amount, the Partnership has been hesitant to commit to the acquisition of a replacement asset.

Relevant legislative provisions

Section 124-70 of the Income Tax Assessment Act 1997

Section 124-75 of the Income Tax Assessment Act 1997

Subsection 104-10(6) of the Income Tax Assessment Act 1997

Subsection 124-70(2) of the Income Tax Assessment Act 1997

Subsection 124-75(1) of the Income Tax Assessment Act 1997

Subsection 124-75(2) of the Income Tax Assessment Act 1997

Subsection 124-75(3) of the Income Tax Assessment Act 1997

Subsection 995-1(1) of the Income Tax Assessment Act 1997

Paragraph 124-75(2)(a) of the Income Tax Assessment Act 1997

Paragraph 124-75(3)(a) of the Income Tax Assessment Act 1997

Paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997

Reasons for decision

Unless otherwise indicated, all references are to the Income Tax Assessment Act 1997 ('ITAA 1997').

Question 1 Summary

The replacement asset rollover under section 124-70 is available in relation to the Partnership's compulsory acquisition of their property.

Detailed reasoning

Section 124-70 describes different events when a roll-over is available to an entity if that event happens to the CGT asset of that entity. According to subsection 124-70(1), a taxpayer can choose a roll-over if the CGT asset that the entity owns is compulsorily acquired by an Australian government agency.

Subsection 124-70(2) states that to be eligible for a roll-over, the taxpayer must receive money or another CGT asset (except a car, motorcycle, or similar vehicle) or both as compensation for the event happening.

Subsection 995-1(1) defines an Australian government agency to mean the Commonwealth, a State or a Territory, or an authority of the Commonwealth or of a State or Territory.

XX ('the agency') is an Australian government agency. The agency provided monetary compensation for the compulsory acquisition of the Partnership's property ('the property'). Therefore, the agency's compulsory acquisition of the property is an event which gives rise to a roll-over under section 124-70.

Question 2 Summary

The Commissioner will exercise his discretion to extend the time limit to acquire the replacement asset.

Detailed reasoning

You can choose a roll-over in relation to the capital gain, provided other requirements as stated in section 124-75 of the ITAA 1997 are met.

According to section 124-75 of the ITAA 1997:

124-75(1) If you receive money for the event happening, you can choose to obtain a roll-over only if these other requirements are satisfied.

124-75(2) You must:

(a) incur expenditure in acquiring another CGT asset (except a depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328) or

(b) if part of the original asset is lost or destroyed - incur expenditure of a capital nature in repairing or restoring it.

124-75(3) At least some of the expenditure must be incurred:

(a) no earlier than one year, or within such further time as the Commissioner allows in special circumstances, before the event happens; or

(b) no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income year in which the event happens.

The relevant provision for you is paragraph 124-75(2)(a) whereby you are required to incur expenditure to acquire another CGT asset to obtain the roll-over.

Subsection 124-75(3) requires you to incur some of the expenditure either one year before or one year after the end of the income year in which the CGT event happens or within such further time as the Commissioner allows in special circumstances.

The time of the CGT event A1 is determined by subsection 104-10(6):

If the asset was *acquired from you by an entity under a power of compulsory acquisition conferred by an *Australian law or a *foreign law, the time of the event is the earliest of:

(a) when you received compensation from the entity; or

(b) when the entity became the asset's owner; or

(c) when the entity entered it under that power; or

(d) when the entity took possession under that power.

The time of the event under subsection 104-10(6) is therefore the date the property was compulsorily acquired by the agency on XX XX 20XX.

As the Partnership did not acquire a replacement asset prior to the disposal of the property, to satisfy subsection 124-75(3), you must incur at least some of the expenditure in acquiring another CGT asset no later than XX XX 20XX, (being one year after the end of the income year in which the event happened), or within such further time as the Commissioner allows in special circumstances (paragraph 124-75(3)(b)).

There are no legislative provisions which provide guidance as to what may constitute special circumstances for the purposes of subsection 124-75(3). The matter depends on the facts of each case.

Taxation Determination TD 2000/40 Income tax - capital gains - what are 'special circumstances' for the purposes of subsection 124-75(3) of the Income Tax Assessment Act 1997? explains that the expression special circumstances in the context of subsection 124-75(3) by its nature is incapable of a precise or exhaustive definition. Some examples of special circumstances are provided under the tax determination.

Example 3 in TD 2000/40 provides an example in which a taxpayer's asset is compulsorily acquired by a State authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In this instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

The lack of certainty as to the amount and timing of the compensation to be received has delayed the ability of the Partnership to search for and acquire an appropriate replacement asset.

Your circumstances fall within scope of what would be considered special circumstances therefore the Commissioner will exercise his discretion under paragraph 124-75(3)(b) to allow an extension of time for the Partnership to acquire a replacement CGT asset.

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